Capital Gains Tax Consequences on the Cancellation of Disposals
01 Jun 2017
The facts of this case is simplified for the purposes of this article and detailed as follows:
On 20 September 2006, the taxpayer sold a property for an amount of R17,72 million resulting in a gain of R9,74 million being declared in the 2007 year of assessment. In terms of this sale agreement the purchase price was payable in instalments of a number of years.
The purchaser failed to make payment of all the instalments as agreed and only made payment of R4,5 million towards the purchase price. As a result of the failure to make payment, the taxpayer instituted legal action against purchaser for the outstanding amount. However, during 2011 the taxpayer and the purchaser entered into an agreement in which the purchaser returned the property to the taxpayer and he retained the payment received of R4,5 million as compensation for damages.
As a result of the cancellation, the taxpayer sought to reopen the 2007 year of assessment to correct the CGT that was previously declared. The court found in favour of SARS argument in that the 2007 assessment had prescribed and therefore could not be reopened. Furthermore, SARS argued a reduction of proceeds (effectively adjusting the CGT) as a result of a cancellation can only be considered if the cancellation occurred in the year during which the disposal took place.
The judgement clarifies that when an asset is disposed of in a year of assessment and the sale is cancelled in a subsequent year, no adjustment is made to the capital gain in the year of disposal but a capital loss is recognised in the year of cancellation.
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